ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 10, 2018
8:03 a.m.
MEMBERS PRESENT
Representative Andy Josephson, Co-Chair
Representative Geran Tarr, Co-Chair
Representative John Lincoln, Vice Chair
Representative Harriet Drummond
Representative Justin Parish
Representative Chris Birch
Representative DeLena Johnson
Representative George Rauscher
Representative David Talerico
MEMBERS ABSENT
Representative Mike Chenault (alternate)
Representative Chris Tuck (alternate)
COMMITTEE CALENDAR
HOUSE BILL NO. 331
"An Act establishing the Alaska Tax Credit Certificate Bond
Corporation; relating to purchases of tax credit certificates;
relating to overriding royalty interest agreements; and
providing for an effective date."
- MOVED HB 331 OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: HB 331
SHORT TITLE: TAX CREDIT CERT. BOND CORP; ROYALTIES
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
02/07/18 (H) READ THE FIRST TIME - REFERRALS
02/07/18 (H) RES, FIN
03/30/18 (H) RES AT 1:00 PM BARNES 124
03/30/18 (H) Heard & Held
03/30/18 (H) MINUTE(RES)
04/04/18 (H) RES AT 1:00 PM BARNES 124
04/04/18 (H) Heard & Held
04/04/18 (H) MINUTE(RES)
04/06/18 (H) RES AT 1:00 PM BARNES 124
04/06/18 (H) Heard & Held
04/06/18 (H) MINUTE(RES)
04/07/18 (H) RES AT 2:00 PM BARNES 124
04/07/18 (H) -- Continued from 4/6/18 --
04/09/18 (H) RES AT 1:00 PM BARNES 124
04/09/18 (H) Heard & Held
04/09/18 (H) MINUTE(RES)
04/10/18 (H) RES AT 8:00 AM BARNES 124
WITNESS REGISTER
KEN ALPER, Director
Tax Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Answered questions during the hearing of HB
331.
MIKE BARNHILL, Deputy Director
Office of the Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Answered questions during the hearing of HB
331.
ACTION NARRATIVE
8:03:24 AM
CO-CHAIR GERAN TARR [following a recess from April 9, 2018,
called the House Resources Standing Committee meeting back to
order at 8:03 a.m.] Representatives Tarr, Birch, Parish,
Talerico, Rauscher, and Josephson were present at the call to
order. Representatives Drummond, Johnson, and Lincoln arrived
as the meeting was in progress.
HB 331-TAX CREDIT CERT. BOND CORP; ROYALTIES
8:03:53 AM
CO-CHAIR TARR announced that the first order of business would
be HOUSE BILL NO. 331, "An Act establishing the Alaska Tax
Credit Certificate Bond Corporation; relating to purchases of
tax credit certificates; relating to overriding royalty interest
agreements; and providing for an effective date."
REPRESENTATIVE PARISH restated the purpose of Amendment 2,
[moved and objected to during the recessed meeting of 4/9/18]
labeled 30-GH2863\A.3, Nauman, 4/9/18, which read:
Page 6, line 25:
Delete "1.5"
Insert "two"
Page 13, line 24:
Delete "of 10 percent a year"
Insert "based on the true interest cost plus
seven percent"
Page 13, lines 29-30:
Delete "1.5 percent and is less than ten percent
applies each year"
Insert "two percent"
Page 14, lines 3-4:
Delete "1.5 percent and is less than ten percent
applies each year"
Insert "two percent"
REPRESENTATIVE PARISH explained HB 331 incorporates two
percentage rates: a fixed 10 percent rate and an approximate
rate of 5 percent, "which floats on top of the true cost of
borrowing for the state." Amendment 2 would provide for the 10
percent rate to float on top of the state's cost of borrowing.
Further, Amendment 2 increases the lower rate by 0.5 percent to
provide the state greater security at lower oil prices.
REPRESENTATIVE BIRCH stated opposition to Amendment 2. He
referred to previous testimony by the Department of Revenue
(DOR) which indicated a 1.5 percent rate is reflective of the
state's cost; in fact, the floating rate is not 5 percent.
Furthermore, the proposed bill is not to make money for the
state but to recover the state's cost, and the amendment does
not reflect the intent of the bill.
CO-CHAIR TARR asked whether the state uses a standard 7 percent
[rate] for other programs such as the Alaska Permanent Fund
Corporation.
8:08:29 AM
KEN ALPER, Director, Tax Division, DOR, advised the state's goal
for a return interest rate is "roughly our own cost and we were
using that 7 percent figure [because] it lines up with what the
permanent fund investment advisors think of as their ...
expected earnings."
8:09:12 AM
MIKE BARNHILL, Deputy Director, Office of the Commissioner, DOR,
added that the permanent fund's expected return is currently 6.5
percent. The rate in the bill was derived from a combination of
earnings reserve assumed return and constitutional budget
reserve assumed return, both of which are lower.
CO-CHAIR TARR asked whether a rise in interest rates would
affect the cost of borrowing.
MR. ALPER further explained during the drafting of the bill
trust interest costs were presumed to be 3.6 percent; rates are
not expected to go down before the initial large bond offering.
Under Amendment 2, if interest [costs] rose to 4 percent, the
state would discount [tax credits] at 11 percent. For example,
for a $100 million company, a buyout offer that was affected by
0.5 percentage point would be adjusted by approximately
$700,000.
8:11:33 AM
The committee took an at-ease from 8:11 a.m. to 8:15 a.m.
8:16:07 AM
CO-CHAIR TARR removed her objection to Amendment 2.
8:16:13 AM
REPRESENTATIVE RAUSCHER objected to Amendment 2.
8:17:47 AM
A roll call vote was taken. Representatives Drummond, Parish,
and Tarr voted in favor of Amendment 2. Representatives
Lincoln, Birch, Johnson, Rauscher, Talerico, and Josephson voted
against it. Therefore, Amendment 2 failed by a vote of 3-6.
REPRESENTATIVE BIRCH expressed his support for [HB 331], which
he described as a creative solution to a long-standing problem
and which could strengthen the state's economy, enhance oil
production and development, and address the state's debt
liability.
REPRESENTATIVE PARISH remarked:
I'd like to just get on record that I wasn't able to
get the third amendment drafted ... to explicitly say
that if we put this into place we plan to depart from
the statutory schedule, and I was ... hoping to find
some way of, of both honoring our statutory
obligations perhaps by having people keep their place
in line ... but we weren't able to get it drafted at
this point. ... And as the bill exists right now, it
would be in my opinion a legitimate, unfortunate, a
poor choice but perhaps a necessary one under the
statute at present, to appropriate not only the ...
statutorily designated amount but also the, whatever
debt service we should decide upon. ... I do remain
somewhat dubious of the bill, I commend the, the
administration for the, the thought that went into
this, it is, in fact, a way to rebalance the playing
field ... it could potentially result in more money in
state coffers I just have some serious reservations
about the schedule of repayment, how it will interact
with the existing statute and the notion of
contracting state debt by another name
8:21:22 AM
CO-CHAIR JOSEPHSON referred to liabilities associated with the
bill and pointed out the contracts created by the bill would be
novation contracts, which are new contracts. He said he was
unsure of the actual liability and said, "... I don't treat the
constitutional questions as entirely frivolous, I think that
there have been some references to AHFC and the pension
obligation history, ... [we're] sort of trying to mirror some of
the ways in which - I think it's [article 9 of the Alaska State
Constitution] - that there are sort of exceptions to the rule
... [and] the constitutionality would be affirmed." He
expressed his support for the motion to move the bill.
REPRESENTATIVE TALERICO said he appreciated the administration's
thorough explanation of HB 331, and views the bill as a plan to
resolve some of the state's tax credit issues. Further, the
bill could restore activity for the industry and grow the oil
and gas industry workforce.
CO-CHAIR TARR said she would not support the bill due to the
[financial] mechanism, although she agreed the [tax credit]
obligation needs to be addressed. She pointed out there is a
statutory schedule for payout, which could be exceeded; however,
when bonds are issued to pay a debt, non-payment could affect
the state's credit rating, thus the proposed state debt would
transfer from "an interest-free debt" to an obligation that may
threaten important state programs. Co-Chair Tarr said her
preference is to establish a state fiscal plan and determine how
to pay the existing debt.
REPRESENTATIVE JOHNSON expressed her support for the bill.
8:27:59 AM
CO-CHAIR JOSEPHSON moved to report HB 331 out of committee with
individual recommendations and the accompanying fiscal notes.
There being no objection, HB 331 was reported out of the House
Resources Standing Committee.
8:29:03 AM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 8:29 a.m.